Lazard Inc (LAZ) 2013 Q1 法說會逐字稿

Good morning, and welcome to Lazard's First Quarter 2013 Earnings Conference Call. This call is being recorded. At this time, all participants are in a listen-only mode. Following the remarks, we will conduct a question-and-answer session. Instructions will be provided at that time.

(Operator Instructions)

At this time, I will turn the call over to Judi Frost Mackey, Lazard's Director of Global Communications. Please go ahead.

Good morning, and thank you for joining our conference call to review Lazard's results for the first quarter of 2013. Hosting the call today are Ken Jacobs, Lazard's Chairman and Chief Executive Officer; Matthieu Bucaille, Chief Financial Officer; and Alex Stern, Chief Operating Officer. A replay of this call will be available on our website beginning today after 10 a.m.

Today's call may contain forward-looking statements. These statements are based on our current expectations about future events that are subject to known and unknown risks, uncertainties, and assumptions. There are important factors that could cause our actual results, level of activity, performance, or achievements to differ materially from those expressed or implied by the forward-looking statements. These factors include, but are not limited to, those discussed in Lazard's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Lazard assumes no responsibility for the accuracy or completeness of any of these forward-looking statements. Investors should not rely on forward-looking statements as predictions of future events. Lazard is under no duty to update any of the forward-looking statements after the date on which they are made.

Today's discussion may include certain non-GAAP financial measures. A description of these non-GAAP financial measures and their reconciliation to the comparable GAAP measures are contained in our earnings released which has been issued this morning. For today's call, will focus on highlights of our performance. The details of our earnings can be found in our press release issued this morning and in our investor presentation of supplemental information, both of which are posted on our website at Lazard.com. Following their remarks, Ken, Matthieu, and Alex will be happy to answer your questions. I will now turn the call over to our Chairman and Chief Executive Officer, Ken Jacobs.

Good morning. Our first-quarter results reflect the uneven pace of the M&A markets, balanced by the strength of the equity markets. Asset management achieved record first-quarter operating revenue and assets under management. This performance was offset by a weak quarter in financial advisory. In advisory, both M&A and restructuring were down at the same time. The first quarter's decline in March draft M&A closings reflected softness in transaction announcements last summer and fall.

Lazard middle market revenue was impacted by the acceleration of transactions late last year in anticipation of tax law changes. Restructuring was down as a result of strong financing markets and US corporate default rates near historic lows. Advisory fees are often lumpy on a quarterly basis. On trailing 12-month basis, our M&A revenue continues to outperform the market, and the publicly announced value of our new M&A transactions is up 40% from the first quarter a year ago.

In asset management, we had record AUM at quarter end of $172 billion, up 3% sequentially from the fourth quarter, and up 10% from last year's first quarter. Our average AUM, which drives management fees, was $171 billion, up 4% sequentially and up 14% from the prior year. In equities, we continue to see demand for our international, emerging markets, and local strategies. In fixed income, we continue to see demand for our emerging-market debt and global fixed-income strategies.

On the cost side, our cost-saving initiatives are mostly complete, and we are beginning to see the benefits. We expect to realize additional cost savings beyond our original target, which Alex will discuss in a moment. Now, Matthieu will provide color on our business activity and financial results.

Thank you, Ken. Lazard's operating revenue declined 17% in the first quarter, reflecting a 39% decline in financial advisory, partially offset by a 14% increase in asset management. While M&A and other advisory revenue was down in the quarter, we continued to advise on the largest and most high-profile transactions, including Berkshire Hathaway and 3G Capital on the acquisition of Heinz; Anheuser-Busch in their acquisition of the remaining stake in Modelo, Qatar Holdings in the Xstrata-Glencore merger, and the sale of DE Master Blenders to a Benckiser-led investor group.

Our sovereign advisory business also continued to be active. In recent months, we advised Piraeus Bank on its acquisition of the Greek banking operations of Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank. Despite lower levels of restructuring activity, our world-leading restructuring group remains engaged in highly visible and complex restructuring and debt advisory assignments, including for Cengage Learning, Eastman Kodak, and the Allied Pilots Association with respect to American Allied.

In asset management, management fees up $220 million were a first-quarter record, 5% higher than the fourth quarter of 2012, primarily reflecting the increase in average AUM. Incentive fees were $9 million compared to $3 million a year ago, reflecting improved performance in select accounts, primarily in Europe. Our asset management business experience $995 million of net out-flows in the first quarter.

Turning to expenses. In the first quarter, adjusted GAAP consultation and benefit expenses was 21% lower than a year ago. Our adjusted GAAP consultation ratio dropped to 60% in the past quarter, compared to 62.7% in the first quarter of 2012, and 61.8% for the full year 2012. This partially reflected our cost-saving initiatives, as well as the end of amortization expense related to 2008 deferred compensation awards. The first quarter GAAP compensation ratio assumed, based on current market conditions, a full-year awarded compensation ratio of 58.5%, which is within our target range.

Regarding non-compensation expense, we had some improvement this quarter, reflecting in part the early stages of our cost-saving initiative. Non-compensation expense in the first quarter declined 5% from the prior-year period. We expect to see further benefits of our cost-saving initiative in the second half of this year.

Now, capital management. We continued to deliver on our commitment to return cash to shareholders, as Lazard remained a strong cash generator. We are increasing the quarterly dividend by 25%, from $0.20 to $0.25 per share. In the first quarter, we returned $176 million in capital to shareholders. We remain committed to offsetting the potential dilution of year-end compensation-related equity (inaudible). In the first quarter, we repurchased 1.8 million shares of our Class A common stock at an average price of $32.85 per share. Alex will now provide more detail on our cost-saving initiatives.

Thank you, Matthieu. The cost savings initiatives we announced six months ago are proceeding as planned. As stated, our goal is to achieve $125 million in annual savings from Lazard's cost base, with the full impact realized in 2014. Our cost-savings initiatives are intended to improve the firm's profitability with minimal impact on revenue growth. Initiatives remain focused on streamlining our corporate structure in consolidating support functions, reducing investments and staff in areas of low return so we can devote more resources to areas with greater long-term potential, and renegotiating or exiting certain third-party contracts. Most of the cost-saving initiatives having been completed, and during the implementation process, we identified additional cost savings. We expect all the remaining implementation to be finished by the end of the second quarter of 2013.

In the first quarter of 2013, associated implementation expenses were approximately $26 million. Combined with last year's fourth-quarter charge, implementation expenses related to the initiatives now total $129 million. We currently expect that second-quarter implementation expenses will not exceed the level of first-quarter 2013 expenses, and we anticipate that the ratio of the additional cost savings to expenses will be approximately one to one, which is the ratio for the initiatives currently underway.

We are confident that our cost-saving initiatives will provide Lazard with greater operating leverage as well as increased flexibility to invest in areas of growth. We continue to believe our initiatives put us on track to achieving an operating margin of approximately 21% or 22% in 2013, assuming 2012 activity levels. This should create a path to achieving our target of a 25% operating margin in 2014, also at 2012 activity levels. Ken will now conclude our remarks.

Thank you, Alex. A few words on our outlook. In the US, the macro-economic environment continues to improve. In Europe, markets are stable, but the macro-economic environment is still challenging. Emerging markets are country-specific, but the overall trend is positive. In our advisory business, we remain cautious that the pace of M&A announcements has been uneven in the first part of this year. We see encouraging signs for US and cross-border activity. Our announced transactions year to date are up from last year, our market share of announced transactions has improved.

In advisory, our first-quarter results temper our view about the first half of this year. The second half of the year, historically, is stronger than the first half. In asset management, even after the market volatility of recent weeks, equity markets have trended higher in the first four months compared to last year. We are performing well in asset classes of interest to institutional investors. Average AUM in the first quarter was 14% higher than the prior year, and we have significant capacity for organic growth. We continue to incubate new investment strategies across our platforms. As a result of our cost discipline, we have the flexibility to continue hiring new senior level people, both in financial advisory and asset management, as opportunities arise.

To summarize, four take-aways on the quarter -- Asset management, strong performance; financial advisory, soft quarter, but good trend on announcements; cost discipline, our cost-savings initiatives are showing results and provide us with increased operating leverage and flexibility; dividend increase demonstrates Lazard's ability to generate cash and our commitment to return capital to shareholders.

We remain confident that with the breadth and depth of our platform, strength of global networks, and our financial discipline, Lazard is well positioned. We're serving our clients with more and better-integrated resources. We're creating value for shareholders of who Lazard employees are the largest single group, and we have substantial operating leverage as the environment improves. Let's open the call to questions.

(Operator Instructions)

Howard Chen with Credit Suisse.

Ken, just beginning on the financial advisory outlook, realizing deal announcements are inherently lumpy and you had a good bit of activity pulled forward into 2012. But I guess the broader question is, with all the good drivers we've been talking about for quite some time, what do you think is holding up the industry from more new deal formation?

Well, it's just -- look, a couple things. First, again back to the three things we look at -- financing, valuation, and sentiment. Let's sort of separate markets. The US, or generally everywhere, financing is -- rates are as low as they've been in our lifetimes, availability high. It's a good sign. On the valuations, they've picked up, but still relative to organic growth, not bad. On sentiment, again, this is more geographic. I think in the US it's improved. In Europe, because of the macro-economic environment, it's still pretty uncertain. In the developing world, market by market a little bit different, but generally speaking, sentiment is improving.

That said, we are in a world that's just different from what it's been pre-crisis, and there's sort of an uneven -- and there's clearly a little bit of a detachment from the M&A markets from the equity markets. That said, I think our view is that in the US, as the US economy continues to improve, in all likelihood the M&A markets should start to follow more closely, sort of more traditional patterns. The European markets are likely to lag for a while because of the challenge macro-economically. I think the flows from the emerging markets -- they look okay at the moment.

Great. Thanks for that, Ken. Shifting gears, I was hoping we could just drill into the asset management flow picture a bit. With all the moving parts, can you help us delineate where you fall out on the desire by your clients to own more equities today versus a year ago, the incubation of some of the new products that you mentioned, and maybe some of the unique dynamics around the global thematics product, in particular.

Sure. Okay, so let's start with our client base. Our client base is primarily institutional. Obviously, we have some impact, some retail exposure, because of the financial institution platforms. But the institutional market tends to be slower in, slower out. It will lag the participation of the retail investor as markets go up, and it is probably more stable as markets go down. I think that's kind of what we are seeing. It's improving. Our fee activity started off strong. It was a little weaker for a couple of weeks and seems to be picking up again, which is real good for us. In terms of our product mix, I don't think we -- I think we're about as well-positioned as we could be, given the demands of our client base. Global, emerging markets, emerging market debt, these are all areas where there seems to be high interest on the part of our core client base.

In terms of thematics, I would say that we pointed out in the fourth quarter that there had been an illness of one of the senior members of our team. We had a B team under that. We expected some outflows. We are probably doing a little bit better on that than we would have guessed for the first quarter. But this is something that will continue over the next several months or so. We are monitoring and working as hard as we can.

Okay, great. Thank you. Finally Alex, I think I heard you note some incremental identified expense savings. I was wondering if you could dig in a little bit deeper as to what the nature of those are. And is the plan to ultimately take up to $125-million program, the 25% operating margin goal? Or are you reinvesting that, or it's just too early to kind of give an ultimate plan?

As we progress through the process of implementing the cost initiatives, we identified a potential additional $10 million to $20 million of savings versus the announced $125 million objective. They're primarily in the same areas we've talked about before -- streamlining our corporate structure and consolidating support functions, reducing investments in staff in areas of low return, and renegotiating or exiting certain third-party contracts; so, consistent with what we've done in the past. With respect to margins, we're still very focused on the 21%, 22% for '13 and the 25% for '14. This provides us a little bit more flexibility in the event of a tougher environment, and also provides an opportunity for us to invest further in the business.

Great. That's really clear. Thanks for taking the questions.

Alex Blostein with Goldman Sachs.

Just picking up on the last question, I was hoping you guys could help us understand a little bit your near-term marketing targets. The way I try to address the question is given the fact that markets are up as much of they are and probably a little bit more than you guys had anticipated in your baseline scenario -- especially hearing you on the 2012 kind of run rate revenue numbers -- is the 21% to 22%, does that stay stale because you have a little bit of a softer outlook for the other, the advisory parts of the business? Because it feels like just on the market the asset management should do a little bit better, and it is a higher-margin business for you guys. So help me understand the moving pieces there?

Okay. Let me start with this and maybe Alex can fill in on it. Look, we are focused on the 25% margin target, as we've been for 2014, and the 21%, 22% for '13. It's too early in the year for us to change our outlook on revenues. We are working hard towards these targets.

Okay. Then, I guess, on Asset Management. Can you guys help us understand a little more granularity on net versus gross flows. You mentioned there could be potentially more redemptions from some of the initiatives you highlighted earlier. Do you know the size of total redemptions that we should still anticipate, and how should we balance that against somewhat of an improving RFD activity that you guys mentioned?

Sure. We had, as you will see in the Q, we had a strong quarter on gross flows, very strong quarter on gross flows, which was offset by the incremental outflows associated with the thematics business and one other -- one of the local businesses, which I think we talked about in the fourth quarter. I think that kind of activity probably continues. The fact is, as I said earlier, the flows out of thematics were probably a little bit less than we expected for the first quarter, but it's going to be something that we're going to be dealing with for the rest of the year. The team we have is quite good, and they're really -- it's a deep team, and I think we're going to manage this pretty well.

Okay, thanks.

Brennan Hawken with UBS.

Just a quick clarifying question on the incremental saves that you guys identified. I think you said $10 million to $20 million on top of the $125 million. You said a one-for-one, and you are already at $129 million of charges. Does that mean that we should think about $10 million to $20 million in one-time charges around restructuring next quarter?

Roughly. What we said is we expect implementation costs to be consistent with what we've already realized, and that's been about a one-to-one ratio. Approximately, that's correct.

Cool, okay. I just wanted make sure on that. Following up, I guess, on the outflows in thematic, is the fact that it's come in a bit lighter than you guys anticipated -- does that adjust your view of overall outflow based on discussions that you guys have had with consultants and clients, or is it just a delay of the flow and maybe it's going to -- this sort of nagging out-flow might be just persisted for a little bit longer?

I'd say both. (laughter) Okay, so it's been a little bit better, perhaps because lion's share of consultants are still neutral to positive on the product. That said, this is just something which we are working hard. It's a great team and they're spending all their time with clients and educating them. But it just isn't something that's going to go away tomorrow.

Sure. Okay. Thanks, that helps. Is there a way to think about or quantify the expected investments that you guys plan to make? Should we think about it as maybe like the investments might offset the additional gravy of the $10 million to $20 million that we hit on before? Can you help us think about how the puts and takes for that might work?

Okay. That's a good question, actually, because the additional savings gives us a little bit more -- a few more levers to reach our targets. So in part what we're doing here is number one, we are opportunistic about hiring. That is, if we see someone great, and could really add value to the franchise on the advisory side, or we see additional resources that help us drive the asset management business, we now have the ability to execute on that without necessarily impinging upon margins. Because as you know, we expense this stuff through awarded as we do it. So, that's number one.

That said, it also gives us a little bit more flexibility if the environment is tougher, or we have a tougher time to hit our targets. So we're going to really modulate between the two. This hiring environment, and particularly on the advisory side, is not a one-time event. This year is better than last year, but it's probably going to continue for the next few years or so.

Great. That helps, thanks. The last one for me -- is it possible, it seemed like in 2012 given the pending tax changes that a lot of folks were worried about, we had a good deal of a pull-forward in mid-markets. My guess is that's going to create a headwind for '13, because we probably pulled a bit into the last year. Is it possible to quantify what that -- what you guys think that might've been, and how we should think about how that might affect the advisory line, all things equal?

Okay. We've never broken out the middle-market business, because it's -- the how we share revenues, credit -- all that stuff internally is rather complex. A lot of it's just team tackling at the firm. But the way I kind of characterize it -- and I pointed this out in the fourth-quarter call -- it was clearly an acceleration of deal activity in the fourth quarter for the middle-market business. It's a sell-side business, people are very sensitive to the tax law changes taking place, and so it's not terribly surprising to see a weak first quarter for us here. This is a time where pipeline is getting re-built. I don't think we're going to see the level of activity this year in the middle-market business that we saw last year. But, it should be -- it's still should be okay. But it will be down from last year.

Okay. But, it's not really something that you're comfortable quantifying for us?

Not at this point.

Okay, fair enough. Thanks for the answers.

Great.

Joel Jeffrey, KBW.

I just want to follow up on the cost savings, again. I apologize if you guys touched on this earlier. I know you guys gave us the ratio of the expenses to cost savings, but in terms of the impact the cost savings plan had on the first quarter, was that consistent there? Was it about a $26 million cost save that you got out of it?

No. You can't look at that. The implementation costs happened ahead of realizing the savings. No, what we're comfortable saying is that on the original $125 million, two-thirds of that should show up in '13 and the full impact in '14.

Okay, great.

The color I will give you on that, though, is the cost saving -- as you know, whatever you put down for your compensation ratio for the first quarter is kind of a guesstimate on what it's going to be for the year -- both on an awarded basis, which we accrued at 58.5 right now on a GAAP at 60. I think I could say that the cost-saving initiatives have given us confidence that we are going to get to this kind of ratios, and be within our target ranges for the year. Then second of all, clearly on our non-comp side we are beginning to see some of the benefits.

Great. Ken I appreciate the color you give us in terms of the geographies that you could see some increased activity in. Are there any verticals that you guys are specifically focused on that you think might be the most opportunistic within the --?

I'll tell you, so far this year, the consumer has done very well for us. The 3G deal and then the coffee deal in Europe, that's a good example. There seems to be -- I wouldn't quite call it big strategic deals in the year, but there's a lot of sponsor interest or smart financial investor interest around that sector. I think the health care services area probably picks up this year. I mean, there's a lot of the -- now that health care reform is pretty much accepted by all as a fait accompli, I think people are now going to start aggressively positioning themselves for more activity there.

There seems to be some pick-up in discussions in the TMT sector, particularly on the telecom and the media side of stuff. Oil and gas seems a little softer than it has been. FIG -- again, the big banks and the systemically important institutions have a very difficult time doing deals now, but you are seeing some smaller medium-sized stuff starting to happen. It's not a single trend here, but those are some important ones, I think.

Great. Just lastly, can you just remind us how much remaining do you have on your repurchase authorization?

We have about $125 million.

Thanks for taking my questions.

(Operator Instructions)

Michael Wong with Morningstar.

Just curious about your marketing and business development expenses. Is the low level, even relative to quarters over the last several years, purely a seasonal effect -- a result of less business to go after -- or is it an effect of your cost-savings plan?

It's a couple of things. First, first quarter last year included a deal-related expense, which isn't here this quarter. Then I think the rest is pretty much the cost-containment measures.

Okay. Would you say there's a different hiring dynamic now between your Americas and European business?

It's interesting. A little bit, but not a lot. In other words, we're just -- the only thing we're focused on is if we're going to hire someone, they have to be really accretive to the franchise. I would say, though, we're a little -- I think we're in pretty good shape everywhere in terms of people. The area that I think we're going to prepare ourselves for is around the cross-border activity a bit.

Okay. Just given that the global economy seems to be in a two steps forward and one or two steps back paradigm, what do think corporate executives that have sat on the sidelines for years building up a cash hoard and have access to financing finally decide to return more capital to shareholders, as you've done, or just pull the trigger on an acquisition to --?

The person that can answer that question after the last three or four years deserves a big bonus here. I would say that, again, it's -- I think we all probably underestimate how much shock there is to the system and how sensitive people are to smaller shocks now in terms of sentiment. But that said, if you get a sustained improvement in US economy, which looks like it's taking place, then you should probably start to get a more consistent level of deal activity in the United States. Then you're going to need some significant healing in Europe before you see that, but the multi-nationals in Europe probably start to act over time like the multi-nationals do in the US. The developing markets -- again, it's country specific, but there are certain countries where you've got some pretty aggressive companies and forward-thinking companies. Brazil's a great example of that.

Okay. Thank you.

Ladies and gentlemen, that concludes today's conference. We thank everyone for joining us.

Thank you.